Government    Ownership 
of  Railroads. 

By    OTTO    H.    KAHN 


An  Address  Before  the 

National  Industrial  Conference  Board 

New  York,  October  10,  1918 


Government    Ownership 
of  Railroads. 

By    OTTO    H.    KAHN 


An  Address  Before  the 

National  Industrial  Conference  Board 

New  York,  October  10,  1918 


/OS/ 


I 

Government  Ownership  of  Railroads 

Paternalistic  control,  even  when  entirely  benevo- 
lent in  intent,  is  generally  harmful  in  effect.  It  is 
apt  to  be  doubly  so  when,  as  sometimes  occurs,  it  is 
punitive  in  intent. 

The  history  of  our  railroads  in  the  last  ten  years 
is  a  case  in  point. 

In  their  early  youth  our  railroads  were  allowed 
to  grow  up  like  spoiled,  wilful,  untamed  children. 
They  were  given  pretty  nearly  everything  they  asked 
for,  and  what  they  were  not  given  freely  they  were 
apt  to  get  somehow,  anyhow.  They  fought  among 
themselves,  and  in  doing  so,  were  liable  to  do  harm 
to  persons  and  objects  in  the  neighborhood.  They 
were  overbearing  and  inconsiderate  and  did  not  show 
proper  respect  to  their  parent,  i.  e.,  the  people. 

But  the  fond  parent,  seeing  how  strong  and  sturdy 
they  were  -and  on  the  whole  how  hustling  and  effec- 
tive in  their  work,  and  how,  with  all  their  faults  of 
temper  and  demeanor,  they  made  themselves  so  use- 
ful around  the  house  that  he  could  not  really  get 
along  without  them,  only  smiled  complacently  at 
their  occasional  mischief  or  looked  the  other  way. 
Moreover,  he  was  really  too  busy  with  other  matters 
to  give  proper  attention  to  their  education  and  up- 
bringing. 

3 


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A?  .Jl^-;  ndl.r0a4sr  grew  -toward  man's  estate  and 
married '  'a'nd*  begot  •  otter ,  railroads,  they  gradually 
sloughed  off  the  roughness  and  objectionable  ways 
of  their  early  youth,  and  though  they  did  not  sprout 
wings,  and  though  once  in  a  while  they  still  did 
shock  the  community,  they  were  amazingly  capable 
at  their  work  and  really  rendered  service  of  inestima- 
ble value. 

But  meanwhile,  for  various  reasons  and  owing  to 
sundry  influences,  the  father  had  grown  testy  and 
rather  sour  on  them.  He  cut  their  allowance,  he  re- 
strained them  in  various  ways,  some  wise,  some  less 
so,  he  changed  his  will  in  their  disfavor,  he  showed 
marked  preference  to  other  children  of  his.  And 
finally,  partly  because  he  was  annoyed  at  the  discov- 
ery of  some  wrongdoing  in  which,  despite  his  re- 
peated warnings,  a  few  of  the  railroads  had  indulged 
(though  the  overwhelming  majority  were  blameless) 
and  partly  at  the  prompting  of  plausible  self-seekers 
or  well-meaning  specialists  in  the  improvement  of 
everybody  and  everything — finally  he  lost  his  temper 
and  with  it  his  sense  of  proportion.  He  struck  blindly 
at  the  railroads,  he  appointed  guardians  (called  com- 
missions) to  whom  they  would  have  to  report  daily, 
who  would  prescribe  certain  rigid  rules  of  conduct 
for  them,  who  would  henceforth  determine  their 
allowance  and  supervise  their  method  of  spending  it, 
and  so  forth. 

And  these  commissions,  wishing  to  act  in  the 
spirit  of  the  parent  who  had  designated  them,  but 
actually  being,  as  guardians  are  liable  to  be,  more 
harsh  and  severe  and  unrelenting  than  he  would  have 
been  or  really  meant  them  to  be,  put  the  railroads  on  a 
starvation  diet  and  otherwise  so  exercised  their 
functions — with  good  intent,  doubtless,  in  most  cases 
— that  after  a  while  those  railroads,  formerly  so  vig- 
orous and  capable,  became  quite  emaciated  and  sev- 


eral  of  them  succumbed  under  the  strain  of  the  regime 
imposed  upon  them.  And  then,  seeing  their  condi- 
tion and  having  need,  owing  to  special  emergencies, 
of  railroad  services  which  required  great  physical 
strength  and  endurance,  one  fine  morning  the  parent 
determined  upon  the  drastic  step  of  taking  things  into 
his  own  hands. 

ii 

To  drop  the  style  of  story-telling:  Individual  en- 
terprise has  given  us  what  is  admittedly  the  most 
efficient  railroad  system  in  the  world.  It  has  done  so 
whilst  making  our  average  capitalization  per  mile  of 
road  less,  the  scale  of  wages  higher,  the  average  rates 
lower,  the  service  and  conveniences  offered  to  the 
shipper  and  the  traveler  greater  than  in  any  other  of 
the  principal  countries. 

It  must  be  admitted  that  in  the  pioneer  period  of 
railroad  development,  and  for  some  years  thereafter, 
numerous  things  were  done,  and  although  generally 
known  to  be  done,  were  tolerated  by  the  Government 
and  the  public,  which  should  never  have  been  permit- 
ted. But  during  the  second  administration  and  upon 
the  courageous  initiative  of  President  Roosevelt  these 
evils  and  abuses  were  resolutely  tackled  and  a  definite 
and  effective  stop  put  to  most  of  them.  Means  were 
provided  by  salutary  legislation,  fortified  by  decisions 
of  the  Supreme  Court,  for  adequate  supervision  and 
regulation  of  railroads. 

The  railroads  promptly  fell  into  line  with  the  coun- 
trywide summons  for  a  more  exacting  standard  of 
business  ethics.  The  spirit  and  practices  of  railroad 
administration  became  standardized,  so  to  speak,  at  a 
moral  level  certainly  not  inferior  to  that  of  any  other 
calling.  It  is  true,  certain  regrettable  abuses  and  in- 
cidents of  misconduct  still  came  to  light  in  subsequent 
years,  but  these  were  sporad^instances,  by  no  means 

5 


characteristic  of  railroading  methods  and  practices  in 
general,  condemned  by  the  great  body  of  those  re- 
sponsible for  the  conduct  of  our  railroads,  no  less 
than  by  the  public  at  large,  and  entirely  capable  of 
being  dealt  with  by  the  existing  law,  possibly  amended 
in  nonessential  features,  and  by  the  force  of  public 
opinion. 

Unfortunately,  the  law  enacted  under  President 
Roosevelt's  administration  was  not  allowed  to  stand 
for  a  sufficient  length  of  time  to  test  its  effects.  The 
enactment  of  new  railroad  legislation  in  1909,  largely 
shaped  by  Congressmen  and  Senators  of  very  radical 
tendencies  and  hostile  to  the  railroads,  established,  for  the 
first  time  in  America,  paternalistic  control  over  the  rail- 
roads. It  was  a  statute  gravely  defective  in  important 
respects  and  bearing  evidence  of  having  been  shaped  in 
heat,  hurry,  and  anger. 

The  States,  to  the  extent  that  they  had  not  already 
anticipated  it,  were  not  slow  to  follow  the  precedent  set 
by  the  Federal  Government.  The  resulting  structure  of 
Federal  and  State  laws  under  which  the  railroads  were 
compelled  to  carry  on  their  business,  was  little  short  of 
a  legislative  monstrosity. 

in 

You  all  know  the  result.  The  spirit  of  enterprise  in 
railroading  was  killed.  Subjected  to  an  obsolete  and 
incongruous  national  policy,  hampered,  confined,  harassed 
by  multifarious,  minute,  narrow,  and  sometimes  flatly 
contradictory  regulations  and  restrictions,  State  and 
Federal,  starved  as  to  rates  in  the  face  of  steadily  mount- 
ing costs  of  labor  and  materials — that  great  industry 
began  to  fall  away.  Initiative  on  the  part  of  those  in 
charge  became  chilled,  the  free  flow  of  investment  capital 
was  halted,  creative  ability  was  stopped,  growth  was 
stifled,  credit  was  crippled. 

6 


The  theory  of  governmental  regulation  and  super- 
vision was  entirely  right.  No  fair-minded  man  would 
quarrel  with  that.  But  the  practical  application  of  that 
theory  was  wholly  at  fault  and  in  defiance  of  both  eco- 
nomic law  and  common  sense.  It  was  bound  to  lead  to  a 
crisis. 

It  is  not  the  railroads  that  have  broken  down,  it  is  our 
railroad  legislation  and  commissions  which  have  broken 
down. 

And  now  the  Government,  in  the  emergency  of  war, 
probably  wisely  and,  in  view  of  the  prevailing  circum- 
stances, perhaps  necessarily,  has  assumed  the  operation 
of  the  railroads. 

The  Director  General  of  Railroads,  rightly  and  cour- 
ageously, proceeded  immediately  to  do  that  which  the 
railroads  for  years  had  again  and  again  asked  in  vain 
to  be  permitted  to  do — only  more  so. 

Freight  rates  were  raised  twenty-five  per  cent,  and 
more,  passenger  rates  in  varying  degrees  up  to  fifty  per 
cent.  Many  wasteful  and  needless  practices  heretofore 
compulsorily  imposed  were  done  away  with. 

Passenger  train  service,  for  the  abolition  of  some  of 
which  the  railroads  had  petitioned  unsuccessfully  for 
years,  was  cut  to  the  extent  of  an  aggregate  train  mile- 
age of  over  47,000,000. 

The  system  of  pooling,  for  which  for  years  many  of 
the  railroads  had  in  vain  endeavored  to  obtain  legal 
sanction,  was  promptly  adopted  with  the  natural  result 
of  greater  simplicity  and  directness  of  service  and  of 
considerable  savings. 

The  whole  theory  under  which  intelligent,  effective, 
and  systematic  co-operation  between  the  different  rail- 

7 


ways  had  been  made  impossible  formerly,  was  thrown 
into  the  scrap  heap. 

Incidentally,  certain  services  and  conveniences  were 
abolished,  of  which  the  railroad  managements  would 
never  have  sought  to  deprive  the  public,  and  the  very 
suggestion  of  the  abrogation  of  which  would  have  led 
to  indignant  and  quickly  effective  protest  had  it  been 
attempted  in  the  days  of  private  control. 

iv    •  I 

For  a  concise  statement  of  the  results  accomplished 
elsewhere  under  government  ownership,  I  would  recom- 
mend you  to  obtain  from  the  Public  Printer,  and  to  read, 
a  short  pamphlet  entitled  "Historical  Sketch  of  Govern- 
ment Ownership  of  Railroads  in  Foreign  Countries," 
presented  to  the  Joint  Committee  of  Congress  on  Inter- 
state Commerce  by  the  great  English  authority,  Mr.  W. 
M.  Acworth.  It  will  well  repay  you  the  half  hour  spent 
in  its  perusal. 

You  will  learn  from  it  that,  prior  to  the  war,  about 
fifty  per  cent,  of  the  railways  in  Europe  were  state  rail- 
ways; that  in  pactically  every  case  of  the  substitution 
of  government  for  private  operation  (with  the  exception, 
subject  to  certain  reservations,  of  Germany)  the  service 
deteriorated,  the  discipline  and  consequently  the  punctu- 
ality and  safety  of  train  service  diminished,  politics  came 
to  be  a  factor  in  the  administration  and  the  cost  of  opera- 
tions increased  vastly.  (The  net  revenue,  for  example, 
of  The  Western  Railway  of  France,  which  in  the  worst 
year  of  private  ownership  was  $13,750,000,  had  fallen 
in  the  fourth  year  of  government  operation  to  $5,350,- 
000.)  He  quotes  the  eminent  French  economist,  Leroy- 
Beaulieu,  as  follows: 

"One  may  readily  see  how  dangerous  to  the  liberty  of 
citizens  the  extension  of  the  industrial  regime  of  the 
State  would  be,  where  the  number  of  functionaries 


would  be  indefinitely  multiplied.  .  .  .  From  all  points 
of  view  the  experience  of  State  railways  in  France  is 
unfavorable  as  was  foreseen  by  all  trifle  who  had  re- 
flected upon  the  bad  results  given  by  the  other  industrial 
undertakings  of  the  State.  .  .  .  The  State,  above  all, 
under  an  elective  government,  cannot  be  a  good  com- 
mercial manager.  .  .  .  The  experience  which  we  have 
recently  gained  has  provoked  a  very  lively  movement,  not 
only  against  acquisition  of  the  railways  by  the  State, 
but  against  all  extension  of  State  industry.  I  hope 
.  .  .  that  not  only  we,  but  our  neighbors  also  may 
profit  by  the  lesson  of  these  facts." 

Mr.  Acworth  mentions  as  a  characteristic  indication 
that  after  years  of  sad  experience  with  governmentally 
owned  and  operated  railways,  the  Italian  Government, 
just  before  the  war,  started  on  the  new  departure  (or 
rather  returned  to  the  old  system)  of  granting  a  conces- 
sion to  a  private  enterprise  which  was  to  take  over  a 
portion  of  the  existing  State  railway,  build  an  extension 
with  the  aid  of  State  subsidies,  and  then  work  on  its  own 
account  both  sections  as  one  undertaking  under  private 
management. 

I  may  add  that  shortly  before  the  outbreak  of  the  war 
the  Belgian  Government  was  studying  the  question  of 
returning  its  State  railways  to  private  enterprise  and 
management. 

Mr.  Acworth  relates  a  resolution  unanimously  passed 
by  the  Fench  Senate  a  few  years  after  the  State  had 
taken  over  certain  lines,  beginning  with  the  words: 
"The  deplorable  situation  of  the  State  system,  the  inse- 
curity and  irregularity  of  its  workings."  He  gives 
figures  demonstrating  the  invariably  greater  efficiency, 
economy,  and  superiority  of  service  of  private  manage- 
ment as  compared  to  State  management  in  countries 
where  these  two  systems  are  in  operation  side  by  side. 
He  treats  of  the  effect  of  the  conflicting  interests,  sec- 

9 


tional  and  otherwise,  which  necessarily  come  into  play 
under  government  control  when  the  question  arises  where 
new  lines  are  tt>  be  built  and  what  extensions  are  to 
be  made  of  easting  lines. 

He  asks:  "Can  it  be  expected  that  they  (these  ques- 
tions) will  be  decided  rightly  by  a  minister  responsible 
to  a  democratic  legislature,  each  member  of  which,  natur- 
ally and  rightly,  makes  the  best  case  he  can  for  his  own 
constituents,  while  he  is  quite  ignorant,  even  if  not  care- 
less, of  the  interests,  not  only  of  his  neighbor's  constit- 
uency, but  of  the  public  at  large?"  And  he  replies: 
"The  answer  is  written  large  in  railway  history.  .  .  . 
The  facts  show  that  Parliamentary  interference  has 
meant  running  the  railways,  not  for  the  benefit  of  the 
people  at  large,  but  to  satisfy  local  and  sectional  or  even 
personal  interests."  He  says  that  in  a  country 
governed  on  the  Prussian  principles,  railroad  operation 
and  planning  may  be  conducted  by  the  Government  with 
a  jfair  degree  of  success,  as  an  executive  function, 
but  not  in  democratic  countries,  where  in  normal  times 
"it  is  the  legislative  branch  of  the  government  which  not 
only  decides  policy  but  dictates  always  in  main  outline, 
often  down  to  the  detail  of  a  particular  appointment  or  a 
special  rate,  how  the  policy  shall  be  carried  out." 

For  corroboration  of  this  latter  statement  we  need 
only  turn  to  the  array  of  statutes  in  our  own  States, 
which  not  only  fix  certain  railroad  rates  by  legislative 
enactment,  but  deal  with  such  details  as  the  repair  of 
equipment,  the  minimum  movement  of  freight  cars,  the 
kind  of  headlights  to  be  used  on  locomotives,  the  safety 
appliances  to  be  installed,  etc. — and  all  this  in  the  face 
of  the  fact  that  these  States  have  Public  Service  Com- 
missions whose  function  it  is  to  supervise  and  regulate 
the  railroads. 

The  reason  why  the  system  of  state  railways  in  Ger- 
many was  largely  free  from  most,  though  by  no  means 

10 


all,  of  the  unfavorable  features  and  results  produced  by 
government  ownership  and  operation  elsewhere,  is  in- 
herent in  the  habits  and  conditions  created  in  that  country 
by  generations  of  autocratic  and  bureaucratic  govern- 
ment. But  Mr.  Acworth  points  out  very  acutely -that 
while  German  manufacturers,  merchants,  financiers, 
physicians,  scientists,  etc.,  "have  taught  the  world  a  good 
deal  in  the  twenty  years  preceding  the  war,  German  rail- 
way men  have  taught  the  world  nothing."  He  asks: 
"Why  is  this?"  And  his  answer  is:  "Because  the  lat- 
ter were  State  officials,  and,  as  such,  bureaucrats  and 
routiniers,  and  without  incentive  to  invent  and  pro- 
gress themselves  or  to  encourage  or  welcome  or  even 
accept  inventions  and  progress.  It  is  the  private  rail- 
ways  of  England  and  France,  and  particularly  of 
America,  which  have  led  the  world  in  improvements 
and  new  ideas,  whilst  it  would  be  difficult  to  mention  a 
single  reform  or  invention  for  which  the  world  is  in- 
debted to  the  State  railways  of  Germany." 

v 

The  question  of  the  disposition  to  be  made  of  the  rail- 
roads after  the  war  is  one  of  the  most  important  and 
far-reaching  of  the  post-bellum  questions  which  will 
confront  us.  It  will  be  one  of  the  great  test  questions, 
the  answer  to  which  will  determine  whither  we  are 
bound. 

And,  it  seems  to  me,  one  of  the  duties  of  business 
men  is  to  inform  themselves  accurately  and  carefully 
on  this  subject,  so  as  to  be  ready  to  take  their  due  and 
legitimate  part  in  shaping  public  opinion,  and  indeed  to 
start  on  that  task  now,  before  public  opinion,  one-sidedly 
informed  and  fed  of  set  purpose  with  adroitly  colored 
statements  of  half  truths,  crystallizes  into  definite  judg- 
ment. 

My  concern  is  not  for  the  stock  and  bond  holders. 
They  will,  I  have  no  doubt,  be  properly  and  fairly  taken 

11 


care  of  in  case  the  Government  were  definitely  to  acquire 
the  railroads.  Indeed,  it  may  well  be,  that  from  the 
standpoint  of  their  selfish  interests,  a  reasonable  guaran- 
tee or  other  fixed  compensation  by  the  Government 
would  be  preferable  to  the  financial  risks  and  uncertain- 
ties under  private  railroad  operation  in  the  new  and 
untried  era  which  we  shall  enter  after  the  war.  I  know, 
in  fact,  that  not  a  few  large  holders  of  railroad  securi- 
ties take  this  view  and  therefore  hold  this  preference. 

Nor  do  I  speak  as  one  who  believes  that  the  railroad 
situation  can  be  restored  just  as  it  was  before  the  war. 
The  function,  responsibility,  and  obligation  of  the  rail- 
roads as  a  whole  are  primarily  to  serve  the  interests  and 
economic  requirements  of  the  nation.  The  disjointed 
operation  of  the  railroads,  as  in  the  past,  each  one 
considering  merely  its  own  system  (and  being  under  the 
law  practically  prevented  from  doing  otherwise)  will,  I 
am  sure,  not  be  permitted  again. 

The  relinquishment  of  certain  features  of  our  existing 
legislation,  the  addition  of  others,  a  more  clearly  defined 
and  purposeful  relationship  of  the  nation  to  the  railroads, 
involving  among  other  things  probable  participation 
of  the  Government  in  railroad  earnings  over  and  above 
a  certain  percentage,  are  certain  to  come  from  our 
experiences  under  Government  operation  and  from  a  fresh 
study  of  the  subject,  in  case  the  railroads  are  returned 
to  private  management,  as  I  trust  and  believe  they  will  be. 

In  theory  and  in  its  underlying  principles,  the  system 
of  public  policy  toward  the  railroads,  as  gradually  evolved 
in  America,  but  never  as  yet  given  a  fair  chance 
for  adequate  translation  into  practical  execution,  appears 
to  me  an  almost  ideal  one.  It  preserves  for  the  country, 
in  the  conduct  of  its  railroads,  the  inestimable  advantage 
of  private  initiative,  efficiency,  resourcefulness,  and  finan- 
cial responsibility,  while  at  the  same  time  through  gov- 
ernmental regulation  and  supervision  it  emphasizes  the 

12 


semi-public  character  and  duties  of  railroads,  protects 
the  community's  rights  and  just  claims  and  guards  against 
those  evils  and  excesses  of  unrestrained  individualism 
which  experience  has  indicated. 

It  is,  I  am  profoundly  convinced,  a  far  better  system 
than  government  ownership  of  railroads,  which,  wher- 
ever tested,  has  proved  its  inferiority  except,  to  an 
extent,  in  the  Germany  on  which  the  Prussian  Junker 
planted  his  heel  and  of  which  he  made  a  scourge  and  a 
dreadful  example  to  the  world. 

And  the  very  reasons  which  have  made  State  railways 
measurably  successful  in  that  Germany  are  the  reasons 
which  would  make  Government  ownership  and  operation 
in  America  a  menace  to  our  free  institutions,  a  detri- 
mental influence  upon  our  national  qualities  of  thought 
and  action,  and  a  grave  economic  disservice. 


13 


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•  .  !    Lisa; 

APR  %>ff  1940 

MAR  101941M 

JAN  21  1944 

<£H    *    2 

^    ::/50JG 

JUN  1     i   1CTM     ** 

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t 

LD  21-100m-8,'34 

554679 


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